What does the process of getting a hard money loan for a fix & flip look like?

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Question: What does the process of getting a hard money loan for a fix & flip look like?

Overview

1. Workflow
2. Preliminary application
3. Preliminary underwriting
4. Appraisal
5. Final underwriting
6. Closing

Workflow

Below, we’ve created a simple flowchart to show you the process of getting a hard money loan for your fix and flip project.

Preliminary application → Preliminary underwriting → Appraisal → Final underwriting → Closing

Let’s break each of these steps down to see what you can expect and what your responsibility is during each step of the loan application process.

Preliminary application

During this stage, you will likely be speaking with some different lenders to see which program or programs best fit your credit profile and specific project. During this period, lenders will often have you fill out a preliminary application in order to get the data they need to prepare their initial terms. 

Here are some examples of information a lender may ask for at this stage;

1. Estimated liquidity
2. Estimated FICO score
3. Purchase price of the subject property (the one you’re trying to fix and flip)
4. The renovation budget of the subject property
5. The after-repair value of the subject property

Preliminary applications are generally not lengthy nor extremely time consuming. At this point, the lender is trying to assess,

1. Are you a good fit for one of their loan programs?
2. What preliminary terms might they be able to offer you?

After you fill out the preliminary application, it is reasonable to inquire about the preliminary terms for your loan. Note that these numbers won’t be hard and fast (they are subject to change based on the ultimate financial data, experience, appraisal, and other factors), but the lender should give you a ballpark estimate, or oftentimes a range, of where you can expect the final loan terms to land.

Some of the items that you will want to evaluate when speaking with different lenders to see which one’s programs fit you best are,

1. Total loan amount
2. LTC/LTV (loan-to-cost/loan-to-value) restrictions 
3. Interest rate
4. Origination points
5. Other fees
6. Term length of the loan
7. Total cost of capital (a calculation based on items 3-6)
8. Is interest charged on the full loan amount or just funded amounts?
9. Time to fund

The above list is not exhaustive, but serves as a reasonable starting point from which you can evaluate lenders. Asking these questions lets a lender know that you are serious and informed about the process, even if you are a new, or newer investor.

Preliminary underwriting

The preliminary underwriting stage is where the lender will evaluate whether or not you are a good fit for their more advanced underwriting criteria. 

Hard money lenders typically have specific underwriting guidelines that they need to adhere to in order to make fix & flip loans, and this is the point in the loan process where they will use those guidelines to ensure that your loan scenario and personal financials are congruent with their internal guidelines.

One example of this is LTARV, or loan-to-after-repair-value. 

Most hard money fix & flip lenders have LTARV maximums of 60-70%.

To provide a quick example of how this might work, let’s say that you are looking at the following deal,

In this case, the lender’s maximum loan amount would be 60% of the $225,000 after-repair value, or $135,000.

There are numerous criteria like the above one that lenders must adhere to, and they will oftentimes vary slightly from lender to lender.

It is during the preliminary underwriting stage that lenders begin to get a very good sense of the feasibility of the loan.

During this stage, you will often be required to submit a loan submission form, which can be thought of as a more in-depth version of the preliminary application. Instead of asking for high-level details, the lender will typically gather more substantive information to confirm that your credit profile and loan request meets their internal underwriting criteria.

Assuming that all checks out at this stage, most lenders will then proceed to the appraisal order step.

Appraisal

Assuming your loan application passes the preliminary underwriting stage, the next step is to provide the materials the lender needs to order an appraisal.

Often, the additional materials you need to submit to order an appraisal for a fix and flip project are,

1. A Scope of Work
2. A Purchase Agreement

The Scope of Work will typically include the renovation line items along with the respective cost of each item.

The purchase agreement is the agreement between you (the buyer of the property/borrower of the fix and flip funds) and the seller of the property that you are purchasing.

We’ll go into greater depth regarding the appraisal in another post, but suffice to say the appraiser will evaluate both the as-is value of the property and the after-repair value of the property.

The appraiser provides the appraisal, or appraisal report, to the lender, and at this point, the lender can begin the final stage of underwriting.

Final underwriting:

The final stage of underwriting is used to confirm that all of the information and documents required for closing have been provided by you, as well as resolve any final underwriting issues. 

At this point, the lender will confirm that the appraisal came back at or around its expected value, and that there are no surprises on the rest of the documentation that has been provided, or more specifically, nothing that would prohibit the lender from making the loan.

Title has been ordered and reviewed at this stage to ensure cleanliness, and the lender will specify insurance requirements.

If you have not already set up a borrowing entity at this point, then the lender may require you to do so.

Assuming title is clean, the lender’s insurance coverage requirements are met, and all other underwriting guidelines have been satisfied, your loan will then move to closing.

Closing

To coordinate the closing of a fix & flip loan, there are generally a number of parties involved;

1. You (the borrower)
2. Your legal counsel
3. The lender
4. The lender’s legal counsel
5. The title company

At this stage, the settlement statement will be circulated so the lender and the title company can ensure its accuracy.

At closing, you will be responsible for signing loan documents that provide the lender a first lien on the property you are purchasing and renovating. This essentially gives the lender the right to foreclose on and take back the property in case you don’t perform (pay back) the loan.

Once all loan documents have been signed, the funds for acquiring the subject property will then be transferred into the title company’s account, and you can purchase your investment property.

As a reminder, most all fix & flip lenders will not provide funds for the rehab of the property until you have completed the first portion of the renovation work, so the initial funds will be used only for the purchase of the property.

Conclusion

As you can see from the above steps, getting a fix & flip loan is a multi-step process. However, it can be quite manageable so long as you are organized and responsive.

Hopefully the above workflow gives you a better idea of the loan process for a fix & flip hard money loan!

Do you have any upcoming fix and flip projects you need financing for?

If so, you can fill out our preliminary application at this link to get started today.